SPEAKING
FREELY Manufacturing a future for
Myanmar's people By George
Gorman
Speaking Freely is an Asia
Times Online feature that allows guest writers to
have their say. Please
click hereif you are interested in
contributing.
Myanmar's
rapprochement with the West presents a rare
opportunity to untangle a web of unfeasible
sanctions, rein in the business oligarchy and
harness the progressive elements within Myanmar's
economy to help alleviate the poverty suffered by
millions of Myanmar citizens.
As the
result of decades of military rule, prominent
industries in Myanmar have been integrated into
the economic portfolios of oligarchs. The newly
enacted Foreign Investment Law does not challenge
this fact, with provisions placing restrictions on foreign
investment in 11
"sensitive" sectors cartelized by the business
elites within the country.
Thus, the
question arises: what alternative is available to
reformists and foreign investors eager to
liberalize the economy?
Manufacturing
presents a clear alternative to long-held
prioritization of extractive and service
industries and to sectors monopolized by business
elites and can be a powerful driver of economic
growth in the long term. Importantly, foreign
investors can play a pivotal role in transforming
Myanmar's low-skilled workforce into a skilled
workforce. Nor is manufacturing likely to confront
restrictions and presents an opportunity for
investors to assert themselves.
In
comparison to service, extractive and agricultural
industries, manufacturing has greater potential
for creating high-quality jobs. As businesses meet
larger economies of scale and integrate into
regional and global supply chains, urban areas
generate more employment opportunities for locals.
Consequently, mid- to high-level production
demands can accelerate wage appreciation, mitigate
wage inequality seen in other sectors, and
encourage the transfer of technology and
international know-how to sustain long-term local
operations.
Myanmar is in a prime position
to follow the Initial success of neighboring
members of the Association of Southeast Asian
Nations, notably Indonesia, Thailand and Vietnam,
that have utilized manufacturing-led growth to
propel them to middle-income countries (MICs).
In 2011, the agriculture and manufacturing
sectors in Myanmar received a meager 1% of total
foreign direct investments (FDI), and of this
amount, manufacturing only accounted for 0.3%. In
contrast, extractive resources monopolized over
90% of FDI.
If Western foreign investors
choose to allocate the majority of their FDI
toward extractive resource and hydroelectric
industries, as Myanmar's Asian partners have done,
then they must abide by the entrenched elite's
terms with regard to the timber, oil, gas,
minerals, construction, power and transport
sectors. The provisions for investment in
"sensitive sectors" under the new Myanmar
Investment Law ensures that the position of
longstanding elites will not be compromised in the
new economy.
Undoubtedly, daunting
obstacles confront foreign investors looking to
jump-start Myanmar's crippled manufacturing
industry. Accusations by the International Labor
Organization in 1997 of forced labor prompted the
removal of Myanmar from the World Trade
Organization's Generalized System of Preference,
which gives export goods from "least-developed
countries" access to developed markets at a lower
tax rate.
Additionally, the imprisonment
of Aung San Suu Kyi in 2003 spurred the West to
levy sanctions on imports from Myanmar that forced
the closure of hundreds of factories and left
100,000 garment workers out of work in an industry
valued at over US$800 million. Notably, from 1999
through 2003, the garment industry composed the
largest percentage of the export sector at 30% and
was a vital engine of economic growth within the
civil society.
Advocates for the garment
industry, such as members of the Myanmar Garment
Manufacturers Association, have been concerned
that low wages (based on 10% to 15% of an item's
total value), compounded with poor working
conditions, will force personnel to worker longer
hours for less. Already suffering from a shortage
of skilled workers, Myanmar's alarmingly high
turnover rate has not abated and has bolstered
competing industries in neighboring Thailand and
China that offer better wages and working
conditions.
Consequentially, it falls on
the Myanmar government to collaborate with new
foreign partners and local business people to
create amenable working conditions, establish
social safety nets and unions, and provide
competitive pay scales for workers ahead of the
formation of the ASEAN Community in 2015.
Without visible improvements in wage
appreciation and in the human development index of
the Myanmar workforce, ASEAN's eased migration
policies for skilled labor could increase the
exodus from Myanmar.
Myanmar has the
opportunity to act now and avoid the economic
malaise and brain drain that has plagued the
manufacturing industry in the Philippines, where
over 11% of the Filipino citizenry, the bulk of
the skilled working class, have emigrated overseas
to find better jobs.
The first mechanism
in jump-starting the manufacturing industry is the
formation of the Myanmar Investment Commission
(MIC). This government-appointed body under the
Ministry of National Planning and Economic
Development is staffed by 20 government officials
with pending staff increases of 30-50 officials in
coming months.
Charged with a steep
learning curve, these officials must meet the
influx of interest in Myanmar's economy, determine
investment ratios and deliver accountability for
FDI inflows. Notwithstanding concerns over the
potential for rent-seeking behavior and
inefficiencies within the MIC, this institution is
in a leading position to build confidence and
trust with foreigner investors looking to navigate
Myanmar's nascent regulatory and export regime.
Critically, the MIC can serve as a
catalyst in revitalizing the ailing manufacturing
sector by easing bureaucratic red-tape and pushing
to lessen labor market restrictions that impede a
company's ability to hire new workers.
Second, outside a generous tax holiday of
five years, and pending approval by the MIC, 100%
foreign ownership being offered to new foreign
enterprises, the Myanmar government should
substantially lower the corporate tax rate to
compete with ASEAN countries and undercut
Thailand's alluring 20% corporate tax rate in
2013. Myanmar should focus on higher volume of
investment in order to spur the manufacturing
industry and generate higher revenue for the state
in the long run.
Third, supporting
manufacturing and production efficiency requires a
transfer of knowledge. Myanmar cannot build a
middle class or a competent workforce in the long
run if foreign investors segregate locals from
managerial and administrative positions.
Requiring foreign firms to employ 75% of
locals within six years is an ambitious target and
cannot be achieved without significant educational
reforms and incentives to motivate foreign firms
to enter a market where they are required to train
a low-skilled workforce, whilst providing equal
pay for local and foreign staff in similar
positions.
The initial tax relief of up to
50% of profits from exports and a tax exemption
for companies that reinvest in their businesses
within one year is a notable start. The
government, however, should extend rewards for
foreign companies that take on the additional
burden of training locals through intensive
apprenticeships, equivalent to vocational
schooling, and promote distinguished local
employees.
Tax breaks, export subsidies,
dividends, import tax waivers and other methods
can be extended and/or adopted to compensate
businesses that share technical know-how in order
to contribute to upgrading local human capital.
Fourth, President Barack Obama's historic
visit to Myanmar this month is a unique
opportunity for the United States to pressure the
Myanmar government into accelerating comprehensive
educational reforms. Neglected by the Myanmar
government, educational institutions receive a
bleak 1% of the government expenditures and have
been chronically starved of funds.
Illiteracy rates are far above officially
reported numbers. Only 85% of children attend
primary school; only 60% of those students are
able to continue on to middle school because of
burdensome school fees. Additionally, universities
have been pushed to the outskirts of major cities
and their quality has declined substantially in
the previous two decades from a lack of state
funding. Unsurprisingly, the only pathway for
upward mobility in Myanmar has been through the
ranks of the military or emigration. This
declining trend in quality of education has to be
reversed. Educational reform will be decisive in
reversing Myanmar's chronically plagued
low-skilled workforce and in meeting the demands
of foreign investors. Importantly, Western
governments can encourage this transformation
through diplomatic pressure to increase
educational spending along with the creation of
select educational programs that target rural
schools.
Moreover, launching Fulbright and
other scholarship initiatives for deprived, but
distinguished, students to pursue their studies at
universities abroad in select academic fields can
help meet Myanmar's immediate developmental needs
(engineering, medicine, biochemistry, agronomy,
and computer science).
Manufacturing
investors tend to make their decisions based on
comparative advantage, and Myanmar's nascent
financial sector, uncertain business environment,
tangled tax regime and dilapidated infrastructure
does not bode well for prospective investors,
irrespective of lifted sanctions and advantageous
investment laws.
Nevertheless, some
responsible investors will still be willing to
take the plunge, and manufacturing offers the path
of least resistance in eroding the nepotism that
has characterized the oligarch-led Myanmar economy
and facilitating a bottom-up socioeconomic
transformation.
George Gorman is
an East Asia and Pacific affairs consultant based
in Washington DC and specialist in Southeast Asian
international affairs. He can be reached at
George.gorman@american.edu.
Speaking Freely is an Asia Times Online
feature that allows guest writers to have their
say. Please click here
if you are interested in contributing. Articles
submitted for this section allow our readers to
express their opinions and do not necessarily meet
the same editorial standards of Asia Times
Online's regular contributors.
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